[Federal Register Volume 75, Number 193 (Wednesday, October 6, 2010)]
[Proposed Rules]
[Pages 61653-61655]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25321]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 75, No. 193 / Wednesday, October 6, 2010 /
Proposed Rules
[[Page 61653]]
FINANCIAL STABILITY OVERSIGHT COUNCIL
12 CFR Chapter XIII
Advance Notice of Proposed Rulemaking Regarding Authority To
Require Supervision and Regulation of Certain Nonbank Financial
Companies
AGENCY: Financial Stability Oversight Council.
ACTION: Advance notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: Section 113 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``DFA'') gives the Financial Stability Oversight
Council (the ``Council'') the authority to require that a nonbank
financial company be supervised by the Board of Governors of the
Federal Reserve System (``Board of Governors'') and subject to
prudential standards if the Council determines that material financial
distress at such a firm, or the nature, scope, size, scale,
concentration, interconnectedness, or mix of the activities of the
firm, could pose a threat to the financial stability of the United
States.
This advance notice of proposed rulemaking (ANPR) invites public
comment on the criteria that should inform the Council's designation of
nonbank financial companies under the DFA.
DATES: Comments on this ANPR must be received by November 5, 2010.
ADDRESSES: Interested persons are invited to submit comments regarding
this advance notice of proposed rulemaking according to the
instructions for ``Electronic Submission of Comments'' below. All
submissions must refer to the document title. The FSOC encourages the
early submission of comments.
Electronic Submission of Comments. Interested persons must submit
comments electronically through the Federal eRulemaking Portal at
http://www.regulations.gov. Electronic submission of comments allows
the commenter maximum time to prepare and submit a comment, ensures
timely receipt, and enables the FSOC to make them available to the
public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments must
be submitted through the method specified above. Again, all
submissions must refer to the docket number and title of the notice.
Public Inspection of Public Comments. All properly submitted
comments will be available for inspection and downloading at http://www.regulations.gov.
Additional Instructions. Please note the number of the question to
which you are responding at the top of each response. Though the
responses will be screened for obscenities and appropriateness, in
general comments received, including attachments and other supporting
materials, are part of the public record and are immediately available
to the public. Do not enclose any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
FOR FURTHER INFORMATION CONTACT: For further information regarding this
interim final rule contact the Office of Domestic Finance, Treasury, at
(202) 622-1703. All responses to this Notice and Request for
Information should be submitted via http://www.regulations.gov to
ensure consideration.
SUPPLEMENTARY INFORMATION:
I. Background
The Council was established by section 111 of the DFA for the
purposes of ``(A) * * * identify[ing] risk to the financial stability
of the United States that could arise from the material financial
distress or failure, or ongoing activities, of large, interconnected
bank holding companies or nonbank financial companies, or that could
arise outside the financial services marketplace; (B) * * * promot[ing]
market discipline, by eliminating expectations on the part of
shareholders, creditors, and counterparties of such companies that the
Government will shield them from losses in the event of failure; and
(C) * * * respond[ing] to emerging threats to the stability of the
United States financial system.'' The Council has ten voting members
and 5 nonvoting members. The voting members consist of the Secretary of
the Treasury who also is the Chairperson of the Council, the Chairman
of the Board of Governors of the Federal Reserve System, the
Comptroller of the Currency, the Director of the Bureau of Consumer
Financial Protection, the Chairman of the Securities and Exchange
Commission, the Chairperson of the Federal Deposit Insurance
Corporation, the Chairperson of the Commodity Futures Trading
Commission, the Director of the Federal Housing Finance Agency, the
Chairman of the National Credit Union Administration Board, and an
independent member appointed by the President with the advice and
consent of the Senate, having insurance expertise. The nonvoting
members are the Director of the Office of Financial Research, the
Director of the Federal Insurance Office, and a State insurance
commissioner, a State banking supervisor, and a State securities
commissioner, each designated by a selection process determined by
their respective state supervisors or commissioners.
Through this ANPR the Council is seeking to gather information as
it begins to develop the specific criteria and analytical framework by
which it will designate nonbank financial companies \1\ for enhanced
supervision under the DFA.
---------------------------------------------------------------------------
\1\ As defined in Section 102(a)(4) of DFA.
---------------------------------------------------------------------------
a. Considerations in Making a Determination
Under the provisions of the DFA, in making a determination on
whether the company should be subject to supervision by the Board of
Governors, the Council must consider:
(A) The extent of the leverage of the company;
(B) The extent and nature of the off-balance-sheet exposures of the
company;
(C) The extent and nature of the transactions and relationships of
the company with other significant nonbank financial companies and
significant bank holding companies;
(D) The importance of the company as a source of credit for
households, businesses, and State and local
[[Page 61654]]
governments and as a source of liquidity for the United States
financial system;
(E) The importance of the company as a source of credit for low-
income, minority, or underserved communities, and the impact that the
failure of such company would have on the availability of credit in
such communities;
(F) The extent to which assets are managed rather than owned by the
company, and the extent to which ownership of assets under management
is diffuse;
(G) The nature, scope, size, scale, concentration,
interconnectedness, and mix of the activities of the company;
(H) The degree to which the company is already regulated by 1 or
more primary financial regulatory agencies;
(I) The amount and nature of the financial assets of the company;
(J) The amount and types of the liabilities of the company,
including the degree of reliance on short-term funding; and
(K) Any other risk-related factors that the Council deems
appropriate.
The Council must consider similar factors in determining whether a
foreign nonbank financial company should be designated and its U.S.
operations and activities subject to supervision by the Board of
Governors. In addition, the Council must consider the factors relevant
to a U.S. or foreign nonbank financial company in determining whether a
U.S. or foreign company, respectively, should be designated for
supervision by the Board of Governors under the special anti-evasion
provisions in section 113(c) of the DFA.
b. Process for Making a Determination
Under the provisions of the DFA, the Council must provide a nonbank
financial firm with advance notice that it plans to designate the firm,
and the firm has up to 30 days to request a hearing and an additional
30 days to submit material. Upon holding a hearing, the Council has up
to 60 days to make a final determination. If a firm does not make a
timely request for a hearing, the Council must notify the firm of its
final determination within 40 days of the firm's receipt of advance
notice from the Council. In making a determination, the Council must
consult with the primary financial regulator, if any, of the affected
firm, and with the appropriate foreign regulatory authorities as
appropriate.\2\ Once designated, the Council must reevaluate its
determination regarding each designated firm at least annually. Council
designations are subject to judicial review. The Council is not
requesting comments on these procedural requirements.
---------------------------------------------------------------------------
\2\ Under Section 113(f), the Council may waive the requirements
on an emergency basis if necessary to prevent or mitigate threats to
financial stability.
---------------------------------------------------------------------------
II. Criteria for Designation
1. What metrics should the Council use to measure the factors it is
required to consider when making determinations under Section 113 of
DFA?
a. How should quantitative and qualitative considerations be
incorporated into the determination process?
b. Are there some factors that should be weighted more heavily by
the Council than other factors in the designation process?
2. What types of nonbank financial companies should the Council
review for designation under DFA? Should the analytical framework,
considerations, and measures used by the Council vary across
industries? Across time? If so, how?
3. Since foreign nonbank companies can be designated, what role
should international considerations play in designating companies? Are
there unique considerations for foreign nonbank companies that should
be taken into account?
4. Are there simple metrics that the Council should use to
determine whether nonbank financial companies should even be considered
for designation?
5. How should the Council measure and assess the scope, size, and
scale of nonbank financial companies?
a. Should a risk-adjusted measure of a company's assets be used? If
so, what methodology or methodologies should be used?
b. Section 113 of DFA requires the Council to consider the extent
and nature of the off-balance-sheet exposures of a company. Given this
requirement, what should be considered an off-balance sheet exposure
and how should they be assessed? How should off-balance sheet exposures
be measured (e.g., notional values, mark-to-market values, future
potential exposures)? What measures of comparison are appropriate?
c. How should the Council take managed assets into consideration in
making designations? How should the term ``managed assets'' be defined?
Should the type of asset management activity (e.g., hedge fund, private
equity fund, mutual fund) being conducted influence the assessment
under this criterion? How should terms, conditions, triggers, and other
contractual arrangements that require the nonbank financial firm either
to fund or to satisfy an obligation in connection with managed assets
be considered?
d. During the financial crisis, some firms provided financial
support to investment vehicles sponsored or managed by their firm
despite having no legal obligation to do so. How should the Council
take account of such implicit support?
6. How should the Council measure and assess the nature,
concentration, and mix of activities of a nonbank financial firm?
a. Section 113 of DFA requires the Council to consider the
importance of the company as a source of credit for households,
businesses, and State and local governments, and as a source of
liquidity for the United States financial system. Given this
requirement, are there measures of market concentration that can be
used to inform the application of this criterion? How should these
markets be defined? What other measures might be used to assess a
nonbank financial firm's importance under this criterion?
b. Section 113 of DFA requires the Council to consider the
importance of the company as a source of credit for low-income,
minority, and underserved communities. Given this requirement, are
there measures of market concentration that can be used to inform the
application of this criterion? How should these markets be defined?
What other measures might be used to assess a nonbank financial firm's
importance under this criterion?
7. How should the Council measure and assess the interconnectedness
of a nonbank financial firm?
a. What measures of exposure should be considered (e.g.,
counterparty credit exposures, operational linkages, potential future
exposures under derivative contracts, concentration in revenues, direct
and contingent liquidity or credit lines, cross-holding of debt and
equity)? What role should models of interconnectedness (e.g.,
correlation of returns or equity values across firms, stress tests)
play in the Council's determinations?
b. Should the Council give special consideration to the
relationships (including exposures and dependencies) between a nonbank
financial company and other important financial firms or markets? If
so, what metrics and thresholds should be used to identify what
financial firms or markets should be considered significant for these
purposes? What metrics and thresholds should be used in assessing the
importance of a nonbank financial company's relationships with these
other firms and markets?
[[Page 61655]]
8. How should the Council measure and assess the leverage of a
nonbank financial firm? How should measures of leverage address
liabilities, off-balance sheet exposures, and non-financial business
lines? Should standards for leverage differ by types of financial
activities or by industry? Should acceptable leverage standards
recognize differences in regulation? Are there existing standards
(e.g., the Basel III leverage ratio) for measuring leverage that could
be used in assessing the leverage of nonbank financial companies?
9. How should the Council measure and assess the amount and types
of liabilities, including the degree of reliance on short-term funding
of a nonbank financial firm?
a. What factors should the Council consider in developing
thresholds for identifying excessive reliance on short-term funding?
b. How should funding concentrations be measured?
c. Do some nonbank financial companies have funding sources that
are contractually short-term but stable in practice (similar to
``stable deposits'' at banks)?
d. Should the assessment link the maturity structure of the
liabilities to the maturity structure and quality of the assets of
nonbank financial companies?
10. How should the Council take into account the fact that a
nonbank financial firm (or one or more of its subsidiaries or
affiliates) is already subject to financial regulation in the Council's
decision to designate a firm? Are there particular aspects of
prudential regulation that should be considered as particularly
important (e.g., capital regulation, liquidity requirements,
consolidated supervision)? Should the Council take into account whether
the existing regulation of the company comports with relevant national
or international standards?
11. Should the degree of public disclosures and transparency be a
factor in the assessment? Should asset valuation methodologies (e.g.,
level 2 and level 3 assets) and risk management practices be factored
into the assessment?
12. During the financial crisis, the U.S. Government instituted a
variety of programs that served to strengthen the resiliency of the
financial system. Nonbank financial companies participated in several
of these programs. How should the Council consider the Government's
extension of financial assistance to nonbank financial companies in
designating companies?
13. Please provide examples of best practices used by your
organization or in your industry in evaluating and considering various
types of risks that could be systemic in nature.
a. How do you approach analyzing and quantifying interdependencies
with other organizations?
b. When and if important counterparties or linkages are identified,
how do you evaluate and quantify the risks that a firm is exposed to?
c. What other types of information would be effective in helping to
identify and avoid excessive risk concentrations that could ultimately
lead to systemic instability?
14. Should the Council define ``material financial distress'' or
``financial stability''? If so, what factors should the Council
consider in developing those definitions?
15. What other risk-related considerations should the Council take
into account when establishing a framework for designating nonbank
financial companies?
Dated: October 1, 2010.
Alastair Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the
Treasury.
[FR Doc. 2010-25321 Filed 10-4-10; 4:15 pm]
BILLING CODE 4810-25-P-P